CIMA P1 - Management Accounting Question Tutorial Sample Questions:

1. A decision maker that makes decisions using the minimax regret criterion would be classified as:

A) Risk averse
B) Risk neutral
C) Risk spreading
D) Risk seeking

2. Explain how probability analysis could be used to assess the risk of the evaluated projects.
Select all the true statements.

A) The company can determine a range of possible outcomes for each of the cash flows in the project, for example, a high, low and medium estimate of each cash flow could be determined.
B) The probabilities can be combined to calculate the expected value of each cash flow element and of the project as a whole
C) The NPVs of a sample range of possible outcomes and the probability of each NPV can be calculated. If a small sample is taken the distribution of outcomes can be used to calculate the zero activities deviation of the NPVs and the probability of success of the projects.
D) The net present value (NPV) of the project, if all high, low or medium estimates occurred, can be calculated along with the combined probabilities of their occurrence.

3. XY, a not-for-profit charity organization which is funded by public donations, is concerned that it is not making the best use of its available funds. It has carried out a review of its budgeting system and is considering
replacing the current system with a zero-based budgeting system.
Select ALL the potential advantages AND disadvantages for the charity of a zero-based budgeting system.

A) It avoids the complacency inherent in the traditional incremental approach where it is assumed that future activities will be very similar to current ones.
B) Preparation of the decision packages will normally require the environment of many employees. This environment may produce useful ideas and promote job satisfaction.
C) In an organization like a charity, the decision packages are not very disparate and difficult t compare.
D) It discourages a questioning approach by focusing attention not only on the cost of the activity but on the benefits it provides. The charity managers will not articulate the benefits encouraging them to think clearly about the activities.
E) In applying traditional budgeting, 'activities' may result in functional departments rather than cross functional activities and thus distract attention from the real cost-reduction issues.
F) The creation of decision packages and their subsequent ranking by top management is very time consuming and costly. The charity will need to assess whether the benefits of the system outweigh the costs involved.

4. RT produces two products from different quantities of the same resources using a just-in-time (JIT) production system. The selling price and resource requirements of each of the products are shown below:

Market research shows that the maximum demand for products R and T during June 2010 is 500 units and
800 units respectively. This does not include an order that RT has agreed with a commercial customer for the supply of 250 units of R and 350 units of T at selling prices of $100 and $135 per unit respectively. Although the customer will accept part of the order, failure by RT to deliver the order in full by the end of June will cause RT to incur a $10,000 financial penalty. At a recent meeting of the purchasing and production managers to discuss the production plans of RT for June, the following resource restrictions for June were identified:
Direct labour hours 7,500 hours
Material A 8,500 kgs
Material B 3,000 litres
Machine hours 7,500 hours
Assuming that RT completes the order with the commercial customer, prepare calculations to show, from a financial perspective, the optimum production plan for June 2010 and the contribution that would result from adopting this plan.
The contribution per unit for R and T will be...?

A) R = $51 per unit. T = $61 per unit
B) R = $45 per unit. T = $66 per unit
C) R = $47 per unit. T = $65 per unit
D) R = $47 per unit. T = $61 per unit

5. RS is a travel company providing daily tours of a major European capital city. The market is highly competitive and RS has commissioned some market research to help with the pricing decision for a new tour. The research identified the probability of three possible market conditions and the number of tickets that would be sold each day at three different price levels.

Demonstrate, using a decision tree and based on expected value, which ticket price RS should choose.

A) RS should charge a ticket price of $70.
B) RS should charge a ticket price of $75
C) RS should charge a ticket price of $90.
D) RS should charge a ticket price of $80.
E) RS should charge a ticket price of $100.

Solutions: